Effects of the financial and economic crisis
In common with other industry players, the repercussions of the financial crisis on capital markets have not left the Talanx Group unscathed. Extensive write-downs were taken on securities in 2008 owing to the adverse capital market climate. The market risk on stocks was then proactively reduced by significantly scaling back the equity allocation over the course of the year and to a very large extent hedging the remaining holdings against price losses.
Talanx’s exposure is limited by the investment guidelines, and dependencies on individual debtors that could jeopardize the Group’s survival are thereby ruled out. In the context of the advancing financial crisis on capital markets, the Talanx Group decided to tighten up the previously applicable risk limits in key respects so to further minimize risks.
Should the current low interest rate level be sustained or indeed should further interest rate cuts ensue, this would give rise to a considerable reinvestment risk for the life insurance companies offering traditional guarantee products since it would become increasingly difficult to generate the guaranteed return. The Group reduces this interest guarantee risk primarily by means of interest rate hedges, under which large parts of the portfolio held by the German life insurance companies are hedged against a low interest rate level through a variety of mechanisms.
The contraction in bank lending that has been observed in the market as part of the financial crisis and the associated potential difficulties raising cash are – irrespective of the availability of extensive unused lines of credit – of only minor importance for the Talanx Group compared to the banking industry for reasons connected with the business model; this is because Talanx inherently has sufficient cash owing to the regular premium payments and interest income from invested assets as well as its liquidity-oriented investment policy. Liquidity risks may, however, arise in particular as a consequence of illiquid capital markets and – in the life insurance sector – due to increased cancellations by policyholders, if this necessitates the liquidation of a large volume of additional investments at short notice. Overall, against a backdrop of declining interest rates, higher volatilities and increased risk spreads, an appreciable drop in the Market Consistent Embedded Value of the life insurers must be anticipated.
Furthermore, the financial and economic crisis may have implications for the business models of the Talanx Group’s individual segments/divisions, such as potentially higher costs for reinsurance protection and possible softening of demand for insurance coverage.